Britain should save the euro – and then cash in

Full fiscal union would allow us to profit from Europe, even as we sat on the
sidelines, says Jeremy Warner.

For many in Britain, the apparent death throes of the single currency allow a smug sense of “we told you so”. The present crisis was as predictable as it is familiar. In every particular, it provides validation for the view Britain adopted nearly 20 years ago when it was ignominiously forced out of the ERM – namely that it’s tough, if not impossible, to sustain a currency union with Germany.

To survive in such a union, your economy has to become ultra-competitive; you cannot rely on devaluation to do the work for you. Yet however competitive you are, somehow or other Germany always manages to stay a couple of steps ahead.

Britain couldn’t stand the heat and got out. Now the same choice – only a much worse one, because leaving the euro is far more difficult and disruptive than simply abandoning a currency peg – confronts the single currency’s peripheral nations.

Yet break-up is not the only option open to Europe. There is another, which is that the solvent North agrees to bail out the stricken South on a more or less permanent basis. Although the politicians dare not admit it in public, this is in fact what’s being progressively forced upon them.

For the moment, however, the rhetoric continues to be that of denial. In Germany’s insistence that the euro cannot be allowed to fail, because it would destroy the European Union itself, and in its coincidental refusal to contemplate the only thing that will ultimately save the single currency in its current form – a permanent transfer union – we see the irresistible force meeting the immovable object.

But rather than facing up to this harsh reality, much of the debate among Europe’s policy elite has got lost in irrelevant trivia. It has become like one of those endless theological arguments, in which the protagonists adopt extreme and intransigent positions over relatively minor and unimportant differences. In this case, it’s nonsense such as when does “reprofiling” of Greek debt become an act of default? Despite the passion with which these issues are argued, they are almost wholly irrelevant to the over-riding choice Europe has to make between break-up and perpetual transfers from North to South.

A year ago, the idea of a second bail-out for Greece would have been regarded as completely unthinkable. But now, here we are with every prospect of the unthinkable happening. Policymakers have convinced themselves that the collateral damage inflicted by a break-up of the eurozone would be infinitely greater than the cost of coughing up. The transfer union has, in practice, all but arrived.

By the way, the debt forgiveness and restructuring urged by some is not a viable third option. You could wipe out Greece’s entire stock of national debt and it still wouldn’t make any difference to the country’s underlying lack of competitiveness relative to Germany. The build-up of external indebtedness would begin anew and we’d soon be back to where we started. No, it’s either kick out the euro fringe, or the political challenge of persuading Germans to subsidise Greeks.

But let’s not worry about which of these options – break-up or fiscal union – is in the best interests of the periphery. That’s ultimately for them to decide. The key question for Britain is which is best for us. The perhaps surprising answer to this question is very much the latter, for what it would do is crystallise a separate choice for the UK – whether we want to be a part of a Europe bounding headlong into full political union or not. Since it is impossible to imagine the UK ever abandoning its fiscal sovereignty to European bureaucrats and political grandstanders, there is no doubt which way we’d swing.

In time, the European Union and its political institutions would become one and the same thing as the eurozone, allowing Britain to retreat to its historic position on the sidelines of Europe, free from the tyranny of majority voting and the insanities of the European Parliament. Like Switzerland and Norway, both of which enjoy something close to free trade with the EU, we could reap the fruits of the single market without being a part of it.

Whether the EU would allow the UK to cherry-pick in this fashion must, of course, be open to question. Switzerland and Norway, both comparatively small economies, are one thing. An economy as large Britain’s is quite another. Furthermore, the development of a common European bond market would likely cause much of the financial services industry to gravitate away from London to rival centres in the eurozone. One of the UK’s chief export industries – the City – might begin to seep away.

Even so, the creation of a fiscal union that Britain was no part of could work to the country’s long-term benefit. The upside of progressive disengagement from the bad bits of the European contract would outweigh the downside risks. It might even be worth the price of the UK contributing to future bail-outs just to ease the process and generate the requisite goodwill.

Certainly, it would not be in the UK’s best interests for Europe to sink back into the frictions of competitive devaluation and the chaos of a second credit crunch. It suits us rather well to have potential rivals for business investment locked into an exchange rate essentially determined by Germany. Far from being a bad thing for the UK, it could actually turn out rather well.